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Real Estate Industry Contradiction


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2009 May 1, 4:19am   16,103 views  63 comments

by Patrick   ➕follow (55)   💰tip   ignore  

On the one hand, we keep hearing from self-interested realtors that "It's a great time to buy" but on the other hand, we have builders demanding a federal bailout, claiming that "Prices will continue falling for the foreseeable future".

Hmmm.

#housing

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1   Malcolm   2009 May 1, 4:10pm  

It's always "a great time to buy or sell a home." :)

2   DennisN   2009 May 1, 6:04pm  

It's always a great time to buy a politician.

I was talking to the realtor who sold my SJ house in 2006. He's unashamedly doing nothing but foreclosure work these days. So he's been able to keep working.

3   Malcolm   2009 May 2, 4:52am  

I hear things have really improved for you guys. Some of my banker friends were on the edge of ruin and now have made a come back. My little LLC has some strong interest from a local banker, which is awesome since we've already picked up four houses and would love a credit line to buy four more. We're getting unheard of cap rates.

4   justme   2009 May 4, 12:33am  

>> time to practice ‘detachment’ after you've defaulted on your .75 million dollar loan.

I find it pathetic with these types who suddenly are getting all "spiritual" to cover the tracks of their gigantic level of arrogance and failure.

If the failure only affected themselves, it would be fair to engage in some introspection, but when you have imposed your losses on the rest of society, it just amounts to sticking your head in the sand and pretending it did not happen (until the next bubble).

5   DinOR   2009 May 4, 3:08am  

justme,

Exactly. It's like "Crawling from the Wreckage" ( in to a BRAND new car! )

Dave Edmunds wrote those lyrics almost 4 decades ago but they're as true today as they ever were. Along w/ DennisN's "friend" we need to make sure these clowns know -just- how we feel about them! Remember, no one can abuse without your permission.

If there's the slightest recognition as to what their actions have led to, "I" certainly haven't seen it? At -any- level! The yokels here in OR tend toward having an attitude of "Don't worry about 'me'! I'll get by working these short sales and repo's".

Oh, and we're SO happy for you...

6   EBGuy   2009 May 4, 8:33am  

Malcolm,
Just curious, does the LLC rely on a property management firm to take care of the day to day operations for the rentals? Also, are you buying "in bulk" from the bank, bidding on foreclosures or picking up "listed" REOs from the MLS?

7   FormerAptBroker   2009 May 4, 11:36pm  

Malcolm Says:

> We’ve already picked up four houses and would love
> a credit line to buy four more. We’re getting unheard
> of cap rates.

What do you consider an “unheard” of cap rate?

How do you calculate your NOI (my quick and dirty is to use gross annual income – mkt. vacancy - $3,000 – Actual property taxes)?

Are you using private money loans (I have heard that it is close to impossible to get bank loans today for investment home purchases)?

8   justme   2009 May 5, 12:50am  

This is wild: The city of Menlo Park is proposing to take an equity stake of up to 30% in homes that are at immediate risk of foreclosure.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/05/BUHJ17ED9B.DTL&type=business&tsp=1

Patrick, it may be time for you to participate in some City Council meetings. This sounds completely insane.

9   sa   2009 May 5, 1:21am  

Shapiro said large banks have expressed interest in the plan, and a small credit union, Community Trust in East Palo Alto, is willing to do the refinancings for Menlo Park, as well as for East Palo Alto, which also is considering the plan.

Any surprise, Large banks want to dump it on cities (Tax payer). Lot of holes in the plan. We probably need to ban creative ideas for a few years, cause the only all ideas floating is to stick it to tax payers "Creatively".

10   HeadSet   2009 May 5, 3:07am  

The city of Menlo Park is proposing to take an equity stake of up to 30% in homes that are at immediate risk of foreclosure.

Incredible. I have an alternate idea. Let all those folks who are so far behind just go into default. Left alone, the banks will resell the forclosed properties at the true market value. This will provide (1) affordable housing for the new owner occupants, or (2) affordable rentals for the homes that get Malcolmed. Falling house prices is the only true long term solution. Easy credit "creativity" will just bankrupt us further while only delaying the inevitable.

11   justme   2009 May 5, 3:17am  

I should add, for those not familiar with Menlo Park:

It is the neighbor of Palo Alto (Bay Area Fortress Central).

It should be noted, though, that a section of Menlo Park is east of US-101 and that section is not part of the fortress ;-)

12   OO   2009 May 5, 3:39am  

Menlo Park, Palo Alto, Cupertino aka fortresses may find such a program more beneficial in supporting their tax revenue than other non-fortresses.

Such a program may be effective in supporting the housing price of cities with very small default percentage and a generally affluent resident base. So anyone who desires to move into such a city must pay the elevated price tag to support the valuation for the rest of the city, upon which property tax is derived. There won't be too much bank dumps because the foreclosure number is quite small, and as long as there are more fools to keep bidding up the price at the level that the city desires, this program may not even cost the city's taxpayers that much money either. It is a ponzi scheme that only works for a very selected number of cities with sound fundamentals to begin with (location has to be inherently good, residents have to be well-off to begin with), and it cannot be a large scale operation, because there'll be risk of running out of fools.

East Palo Alto has absolutely no chance of reaping any benefits. They are out of their mind.

13   OO   2009 May 5, 3:41am  

I think Palo Alto will have a much better chance of success with this program than Menlo Park, Menlo Park has a quite big stretch of area extending to the east of 101 (the poor Menlo Park) with Redwood City profile of residents.

This program will definitely work with Atherton, Los Altos Hills.

14   DinOR   2009 May 5, 5:41am  

Oh God. As it goes to eat it's own head they are implying that CALPERS and teachers could "offer it to their own members".

This just makes being in the Cram Down Camp all that much tougher. There's no freaking need to involve the taxpayers or... calpers... or anyone 'other' than the bank that just couldn't loan enough against the home!

You bought it, you name it! Saying "just let the current loanowners default and it takes care of everything" kind of let's the bank off the hook in that they'll get the write off, the option to keep it off the market and re-sell at a time & price of THEIR choosing!

Besides, most of the MEW-aholics are Long Gone. They're either on the lamb or actively defending their multiple purchases/ponzi in court.

15   RealEstate Joe   2009 May 5, 6:05am  

Going into the Real Estate lending business is a wrong move for any local government. But some kind of creative thinking along those lines that will benefit the community is a good first step.

The story this morning on KCBS about banks bulldozing new house construction in Victorville due to foreclosures, a non-existing buying market and the local government racking up fines, is awful.

There should be some communication and negotiation with local government and lenders in the area to come up with a workable solution that benefits the community rather than resorting to destruction of assets.

16   HeadSet   2009 May 5, 7:14am  

The story this morning on KCBS about banks bulldozing new house construction in Victorville due to foreclosures

Instead of bulldozing, firefighter practice?

17   HeadSet   2009 May 5, 7:18am  

Saying “just let the current loanowners default and it takes care of everything” kind of let’s the bank off the hook in that they’ll get the write off, the option to keep it off the market and re-sell at a time & price of THEIR choosing!

Some states have laws about how much REO a bank can have. Does California have a waiver on that? I thought that if a bank has too many forclosures on the books, the REO laws would force them to sell in the current market, with no option to wait it out.

18   DinOR   2009 May 5, 7:37am  

Headset,

That may depend on whether they are a state chartered or nationally chartered bank. I believe at some point the OCC steps in. I just think it's unfair for cities that are struggling to provide basic services even having to throw time, effort or money at what clearly is a private sector, banking created problem? Don't they have enough of their 'own' self inflicted problems?

As for demolishing these nigtmares, AFAIK they weren't even finished homes? Foreclosed on whom? Maybe these builders should send the bill to the city or form some sort of public/private venture to deal w/ that too?

19   justme   2009 May 5, 7:37am  

Bulldozing new houses is obscenity of the highest degree. As if we do not waste enough natural resources and energy already. It makes me ill just thinking about it.

Anyone that bulldozes houses to keep supply down should be penalized severely. Give them away to the government, yes, bulldoze, NO.

20   DinOR   2009 May 5, 7:39am  

justme,

Gonna' beg to differ here, building them in the -first- place was obscene!

21   sa   2009 May 5, 7:54am  

I don't know specifically about the area, from what i learnt for the article, bank didn't think they could sell it for 5 years. Rather than wait for termites to do their work and keep paying for taxes and violations, I would think bulldozing them was a better option.

I don't think this was a case of trying to bring down supply. Probably a case of "Just, no more head-aches please".

22   justme   2009 May 5, 9:01am  

sa,

Selling them is simply a matter of price. For $5000, people would buy them. This is not some run-down shack in Detroit. It's a new house!

23   justme   2009 May 5, 9:05am  

DinOR,

Of course! But let us not make bad decisions worse by compounding with yet another set of bad decisions.

24   DinOR   2009 May 5, 9:28am  

sa,

As far as "I" could tell? I'm not sure if the video off of Mish's was Victorville but the homes getting the ax were in the middle of NO where. In fact, other than sand, the only feature at all.

Personally, I think they're a liability for all involved. Locals included. I will say that *astrid among others predicted this as early as 2006. Of course then, half jokingly. We argued that at some point, providing b-a-s-i-c services would become totally impractical!

How will people of limited means commute? Where will they work? Even at a reduced rate, how can that make that remote locale viable? But it was a lot easier to determine their fate back then.

25   justme   2009 May 5, 9:40am  

More OT: I discovered that listing data varies across MLS access providers. Specifically, I see that ZipRealty shows much fewer listings than Mlslistings or Redfin do.

As an example, use Milpitas, no filtering except Class 1-2 only. The number of listings that appears are

110 Ziprealty
150 Redfin
158 Mlslistings

Does anyone know what the differences are?

26   justme   2009 May 5, 11:26am  

DinOR,

>>Personally, I think they’re a liability for all involved. Locals included.

I bet the locals hate cheap housing. On that same note, let us just burn down some of those foreclosures in Menlo Park. That will learn'em !!

Seriously DinOR, do you not see how obscene this is? If they are in the M-O-N, why not market them as vacation homes, then? I'll take one.

27   justme   2009 May 5, 11:37am  

Bap33,

It *may* be that the local mls can mark some of the listings as do-not-disseminate.

But still it is weird that ziprealty adheres, but redfin and mlslistimgs.com do not. Does it make any sense?

28   justme   2009 May 5, 12:08pm  

From CR:

>>On the night of April 27, for instance, the president invited to the White House some of his administration's sharpest critics on the economy, including New York Times columnist Paul Krugman and Columbia University economist Joseph Stiglitz. Over a roast-beef dinner, Obama listened and questioned while Krugman and Stiglitz, both Nobel Prize winners, pushed for more aggressive government intervention in the banking system.

Right on, Obama is a person that will listen to a variety of views. Next: Alan Greenspan and Milton Friedman (or is he dead?)

29   justme   2009 May 5, 12:14pm  

Another one from CalculatedRisk:

>>Banks that want to return Troubled Asset Relief Program funds will have to demonstrate their ability to wean themselves off ... a guarantee of debt issuance offered by the Federal Deposit Insurance Corp. ...

Again, a good move by Obama. Those banks that have been complaining about "not being allowed to return the money" have hereby been exposed as cheats. The banks wanted to return the money, and replace it with money they borrowed with the help of an FDIC government guarantee !! Talk about being disingenous. Phew.

30   justme   2009 May 5, 5:42pm  

TOB,

"not allowed to touch"

Perhaps we should point out that this is not Obama preventing you or anyone from withdrawing.

It is rather the mutual fund company that has invested in illiquid (read: overvalued) commercial real-estate, and that does not have cash to pay out without selling huge chunks of the investment at big losses.

31   justme   2009 May 6, 12:40am  

TOB,

I don't think so. They haven;t even started talking about CMBS yet (Commercial mortgage backed securities, as opposed to Residential MBS).

In any case, 100s of B of dollars is nowhere near enough to cover the problem.

32   DinOR   2009 May 6, 2:38am  

Oh... that was only added to make it more freaking dramatic. Anyone that owns a CREIT knows that. Would it make anyone feel better if you weren't able to access it in your CASH account!? Sheesh.

Ahem, over the years many here and elsewhere have bemoaned the loss of Defined Benefit Plans. Want to talk about "illiquid"!? One of the Plans I was involved in, long before even the Tech Wreck, had access only granted ( once ) a year. As I'd -just- missed the Liquidity Window I had to wait about 15 months just to transfer the damn thing. Not 'liquidate', t-r-a-n-s-f-e-r.

We had absolutely no choice in terms of 'what' we were invested in, 'how' it was invested nor the right to make -any- changes! We were paid less than our counterparts elsewhere in the industry and we were told "the company PAYS for your retirement benefits!" What a joke.

I am hereby permanently shutting down all 401k's, IRA's and Qualified plans! Period. End of discussion.

33   justme   2009 May 6, 3:00am  

DinOR.

That's crazy bad. I think the worst limitation I have seen was being allowed to re-balance the funds in the 401k only once per quarter.

Of course they only had something like 5-6 funds to choose from...

34   justme   2009 May 6, 3:03am  

Thomhall,

Some buyers have spring fever, some sellers are underpricing the listing for the effect, The latter has been clearly documented for SF on socketside.com last month.

Price the listing 100k under the competition an bidders will go hog wild, Sometimes.

35   EBGuy   2009 May 6, 3:36am  

Evidently, this town has enough funds to get creative with the problem of foreclosures.
Desperate Households
What do you do with a house that won't sell... Paint the lawn.

36   justme   2009 May 6, 3:37am  

I posted my diatribe against bulldozing homes also on CR. Here's a response.

>>Real "green" and "eco-friendly". Why not donate it to habitat for humanity, salvation army, hell, even ACORN for all I care?

Here's what I think : They need to tear them down, or else all the business school students would be out of their one-weekend Habitat For Humanity jobs(*), building houses for the poor.

(*) AKA: PR-and-insincerity-101

37   DinOR   2009 May 6, 4:03am  

justme,

After utterly slamming the idea of Dozing homes yesterday, some folks at Ben's have had a change of heart. There's some sober realities I think we all need to face. Particularly the remote nature of this extreme edge of the rolling bubble?

Had these homes been in the heart of the city, I'd be protesting in front of the bulldozer my DAMN self! What are you doing!? People might actually be able to live there!

Some of these developments were so far flung, their sole support was cheap gas. When that evaporated, so did these.

38   Malcolm   2009 May 6, 4:11am  

EBGuy Says:
May 4th, 2009 at 3:33 pm
"Malcolm,
Just curious, does the LLC rely on a property management firm to take care of the day to day operations for the rentals? Also, are you buying “in bulk” from the bank, bidding on foreclosures or picking up “listed” REOs from the MLS?"

Sorry, I don't check the blog as often as I used to.
No, we're not that big yet, we are just buying one at a time. The broker that I make loans through does buy in bulk from banks, but honestly, my LLC is getting way better deals, mainly because we aren't buying in California. We are self managing with our own employee(s) who also happen to do a lot of our rennovation work. We have found that the area is lacking in good property management although we have used their services.

39   justme   2009 May 6, 4:23am  

I don't agree with the type of logic that says "Must raze foreclosed developments that are more than X miles away from a city of population > Y".

But just to go with it for a moment:: Victorville is a city or hamlet of 107,721 people. I think that is big enough that something useful could be made of the houses.

What if someone forecloses on their vacation home development in Lake Tahoe?
Raze it? Too far from Reno?

But seriously, DinOR, I'm not saying all this to quarrel with you or anyone else. I just find it sickening to see all the resources, materials, labor and energy go to complete waste. And the logic makes very little sense to me. Peace.

40   Malcolm   2009 May 6, 4:28am  

FormerAptBroker Says:
May 5th, 2009 at 6:36 am
Malcolm Says:
> We’ve already picked up four houses and would love
> a credit line to buy four more. We’re getting unheard
> of cap rates.
What do you consider an “unheard” of cap rate?

30%

"How do you calculate your NOI (my quick and dirty is to use gross annual income – mkt. vacancy - $3,000 – Actual property taxes)?"

I use actual, but until I have a full year I can only project gross, minus taxes, and insurance. I also take out $100 per month for maint, although technically since they are houses our lease calls for the tenant to be responsible for maint and upkeep but you know how that goes.

"Are you using private money loans (I have heard that it is close to impossible to get bank loans today for investment home purchases)?"

So far we are totally self-funded. Basically my LLC is a fund where investors have an equity stake in relation to the total. The ROI is high enough that moving forward it makes more sense to get debt financing as opposed to equity financing because then the spread is additional income to the existing members. Where other investors are having trouble like you say, is that banks won't lend on the market value of a distressed home so investors have to pay cash until they get a loan on the finished property. We've taken the other approach, which is to self fund, build up a portfolio. We can sell when times are better or we can borrow against the portfolio to acquire more houses. Being a cash buyer is the way to get a great deal in depressed parts of the country. I don't want to brag but this fourth house that we are closing on will cost a total of $20,000 including the work to fix it, and will rent for $800 per month.

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